Europe closes higher on eve of Fed's rate decision

Shares of financials shake off recent losses; miners also higher

By

SarahTurner

LONDON (MarketWatch) -- European shares scored their third rise in six sessions on Tuesday, lifted by gains for financial and mining equities a day before a key decision on U.S. interest rates by the Federal Reserve.

Of national indexes, the French CAC-40 index (1804546) finished up 1.9% to 4,941.45, the German DAX 30 index (1876534) ended the day up 1.1% to 6,892.96 and the U.K.'s FTSE 100 index (UKX) advanced 1.7% to 5,885.20.

Still, data are currently a mixed bag. On Monday, bleak figures on the battered U.S. housing market further fueled hopes for another Fed rate cut. See Monday's Market Snapshot.

The Fed starts its two-day meeting on Tuesday, with a decision due to be announced after European stock markets have closed on Wednesday. Fed policymakers are likely to vote to cut rates again, this time by half a percentage point, according to a former top Fed staffer. See Fed story.

"Hopes are on the Fed. It looks like it's going to be at least a quarter-point (cut)," said Philippe Gijsels, senior equity strategist at Fortis Bank in Brussels.

Although the Stoxx 600 index is off some 11% for the year to date, it has managed to claw back around 5% since last Thursday as investors reassess the market in the light of the recent sharp declines.

Mislav Matejka, European equity strategist at J.P. Morgan, upgraded the region to overweight earlier Tuesday. The broker noted that a typical "recession trade" has largely already been played out in Europe while technical, sentiment and valuation models are now in buy territory.

To accompany the more positive view on the broader market, the broker reversed sector preference to favor cyclicals over defensives by upgrading industrials to overweight and downgrading utilities to underweight.

Cyclical-type firms performing well Tuesday included German industrial conglomerate Siemens (723610)
SI
which also revealed that its management has started to buy shares in the firm for the first time in three years. Shares ended up 3.6%.

And Gijsels said that a bounce was overdue after the recent share losses. "We had a very bad day (last week) ... related to Societe Generale," he said.

Banking gains

Stocks on the rise on Tuesday included those that sold off sharply in recent sessions, such as banking groups Natixis (012068), up 6.5%, and Commerzbank (803200), which ended the day up 5.9%.

In addition, shares of Societe Generale (013080) closed 10.4% higher as bid speculation continued to mount after last week's shocking news of a massive trading loss and further asset impairments. See full story.

Gijsels said that uncertainty swirling around the financial sector is one of the reasons that he remains cautious about prospects for the European equity market and is advising clients to sell into strength.

Indeed, a bit of downbeat European economic news emerged in France on Tuesday. The country's consumer-confidence indicator fell four points to a weaker-than-expected negative 34 in January, a 21-year low.

All the same, Gijsels also said that he's wary about being too negative on financials, in the belief that the battered-down sector could lead the way if European markets stage a comeback.

Miners advance

Also on the move, shares of mining firms advanced as gold futures stayed near recent record highs. In London, shares of Anglo American (AAL) finished the day up 5.8%.

The benchmark gold contract surged to a new record on Monday, as a weaker dollar, South African power outages and expectations of another Fed rate cut combined to boost demand for the precious metal. See full story.

Travel-related shares also managed a strong sector move.

Sparking the gains was Tui Travel (TT), created through the merger of First Choice Travel and the tourism arm of Germany's Tui AG (TUAG00).

Tui Travel said integration's progressing well and raised its synergy target by 50% to 150 million pounds a year. Shares of Tui Travel rose by 0.4% in London, while Tui jumped 5% in Frankfurt.

"Current trading has slowed, as expected, but has held up relative to other consumer stocks," noted analysts at Citigroup. "We believe that the potential upside for Tui Travel is considerable."

Other travel stocks turning the tables on recent losses included Ryanair (RYA), up 2.8%, and British Airways (BAY), up 5.1%. And shares of Thomas Cook (TCG) moved up 5.5% ahead of the tour operator's own update due out on Wednesday.

Meanwhile, shares of French media group Lagardere (013021) surged 5.5% to just over 49 euros in Paris after Merrill Lynch upgraded the firm to buy from neutral and set a price target of 60 euros.

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